This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Sept 28 – Oct 4, 2015.

IN THE last few decades, the planet has been rocked by such erratic changes to the climate that the topic of climate change is no longer just on the lips and agendas of environmental groups, but a grave concern for the private sector as well. In fact, many companies have sprung up, looking to reverse the effects of climate change through sustainable initiatives.

For a long time, investing in clean energy start-ups or small-scale utility projects, aimed at making carbon-fuelled sources of electricity obsolete, has been the domain of venture capitalists and private equity firms that invest on behalf of their institutional or high-net-worth clients. But now, with the good use of technology and supportive regulatory environments, socially conscious entrepreneurs are able to reach out directly to the man in the street to gain support for their projects.

One such initiative is the UK-based Trillion Fund, an online renewable energy investment platform launched in June 2012, which has attracted more than 400 mini-financiers to fund solar, wind, hydro and biomass projects listed on its website. 

Last year, Trillion Fund merged with the UK’s first crowdfunding platform for the social enterprise sector, Buzzbnk. Co-founded by Trillion Fund deputy CEO Theresa Burton, Buzzbnk is one of the biggest social crowdfunding entities in the UK, with more than 14,000 users. Since last year, it has owned and operated the technology behind Trillion Fund’s new platform.

Burton, who spoke to Personal Wealth during the World Capital Markets Symposium in Kuala Lumpur recently, says Trillion Fund’s main goal is to address climate change and engage the British public in participating in renewable energy. Renewable energy is a hot investment in the UK right now, given the secure income it generates for investors in the long run.

“From our perspective, it is as much mission-led as it is offering democratic access to finance,” Burton says. 

With a minimum £50 (RM332) investment, individual investors can tap into the opportunity to profit from clean energy by buying shares in unlisted companies or projects. “It is as much about trying to build awareness and support for renewable energy and climate change as it is about offering decent financial returns. It is really important to us that our clients are not sacrificing or compromising on financial returns just because it is renewable energy,” Burton says. 

She points out that it is important borrowers do not take more risk than necessary. The Trillion Fund’s objective is to drive an annual investment of US$1 trillion (RM4.3 trillion) in clean energy to prevent further global warming and to give people good returns on their investment.

The online marketplace started out with solar and wind projects, but has ventured into other forms of renewable energy such as hydro and biomass. On its website, it has a list of projects that are seeking capital from investors, along with information on the minimum investment amount and targeted annual returns.

It also has its own benchmark or target fundraising. If a project does not attract enough support, or what Trillion Fund refers to as the “tipping point”, the money is not invested.

“We provide on average loans of £1 million, up to £4 million, and the loans are asset-backed because they will be secured against wind turbines or solar panels,” Burton says. 

Income is not guaranteed, she adds, but target returns — of 5% and 7% for solar and wind projects respectively — are set in line with power generation projections.

“Investments in renewable energy were impossible for the average public to participate in at [investments of] £50 and £100. In the UK, most funds had an entry level of £10,000. So, if you wanted to invest in renewable energy, you really needed to be high-net-worth,” Burton says.

“It wasn’t inclusive at all. The point about crowdfunding is to be inclusive. There is no reason the green fund couldn’t let somebody invest £100, whatever their overheads are. But it was mostly because they weren’t interested.”

By making renewable energy accessible from an investment point of view, it becomes a part of one’s life, and could eventually make a difference in public energy consumption, Burton points out.

Under the rules set by the UK’s financial industry regulators, the Financial Conduct Authority (FCA), investors must certify that they understand the risks and will not allocate more than 10% of their investable assets to crowdfunding, says Burton. “Investing in renewable energy is lower risk than equity crowdfunding, and we feel it is a really nice stepping stone to begin investing their own money if they haven't done it before.”

Equity crowdfunding in the UK is comparatively riskier as it was started primarily to catalyse start-ups. Asset-backed renewable energy projects, on the other hand, offer a sense of security, she notes. 
“Start-ups are risky … they don’t have the track record yet and they might even be pre-revenue. You are lucky if even one in 20 survives. So, we work very hard to make sure that investors are very clear about how risky that is,” she adds. 

According to Nesta, the UK Alternative Finance Industry Report 2014, the alternative finance market in the UK was estimated to have received £1.74 billion in funding last year — almost double the £666 million received in 2013. 

While business and consumer peer-to-peer (P2P) lending platforms were worth £749 million and £547 million respectively last year, equity crowdfunding — valued at £84 million during the same period — grew more than fourfold from 2012 to 2014. 

“It is growing at 400% a year and providing vital capital to start-ups, but it is very risky as lenders have no oversight on when they will get their money back as it is not a trading platform and it is not liquid. For a lot of people, the motivation is as much about the investment as it is about participating in a new company, new technology or new product,” says Burton. 

The alternative finance market has provided working, growth and expansion capital to an estimated 7,180 small and medium enterprises (SMEs) as well as crucial funding for hundreds of community and voluntary organisations across the UK, states the report.
 
While crowdfunding as an alternative means of investing is still unproven, it allows individuals to try their hand at investing, as most platforms have a relatively low entry requirement. However, investors are made aware of the risks and the fact that they are not covered by the Financial Services Compensation Scheme (FSCS). 

“We are regulated by the FCA. But like all peer-to-peer lending platforms and all equity crowdfunding platforms, there is no financial compensation scheme in the way your savings deposits are protected because there is always a risk in investing. However, as the FCA regulates these platforms, the lender and investor can go to the financial services ombudsman with their complaints,” explains Burton. 

Much of the growth is attributed to the support of the UK government, which offers up to 30% tax breaks under the Social Investment Tax Relief for social investments. Equity-based crowdfunding deals, specifically, are eligible for the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, which also give tax breaks. “This is fundamental to help offset the risk,” says Burton. 

To mitigate the risks involved in the renewable energy financing sector, Trillion Fund, for example, ensures that it only lends up to 70% of the value of the asset it backs so that there is a 30% margin if something goes wrong. 

There is one problem, however. The UK government is currently undertaking a review to cut feed-in tariffs (FiTs) available to those who install new small-scale solar photovoltaic panels, or wind or hydroelectric-generating equipment, from next year onwards.

FiTs provide long-term financial incentives to businesses and homeowners to generate electricity using renewable sources. Under the scheme, those who have installed renewable energy sources are eligible for guaranteed “generation payments” for the power they generate and “export payments” for additional power they provide to the grid.
 
Trillion Fund, in an Aug 4 statement on its website, says the cuts could limit access to crowdfunding for clean energy projects, many of which are set up by local communities wanting a more secure supply, as they need to deliver returns that are attractive enough to small investors to be successful.

“When we talk to developers, they are definitely concerned as they are not quite ready to be weaned off the FiTs just yet. The margins are so skinny that [renewable energy projects] are still sensitive to the FiTs,” says Burton.

“For the loans we have done today, they are fine because there is no grandfathering of the review … those guys are guaranteed their FiTs. The problem is for us to raise new loans. The lenders who have lent today are absolutely fine. Their renewable energy FiTs are guaranteed for the life of that asset,” she adds. 

Prior to the regulatory changes, Trillion Fund targeted to raise £1 billion for renewable energy by 2018, but Burton says the platform might adjust its target if the changes are implemented. 

Trillion Fund selects projects after doing a thorough due diligence on borrowers, including studying their weather data and electricity agreements. The platform also provides progress reports to its lenders.

Unlocking potential capital 

Trillion Fund deputy CEO Theresa Burton says the UK-based crowdfunding platform is looking to collaborate with the Securities Commission Malaysia (SC), which is in the process of setting up a regulatory framework for the local financial technology (fintech) industry, focusing primarily on equity and debt crowdfunding.

Apart from crowdfunding for renewable energy projects and social enterprises, Trillion Fund also white-labels its technology. “We offer our technology and services to other crowdfunding platforms. We have one in South Africa, which is focused on rewards-based crowdfunding as the regulatory environment there is not quite ready to do equity or debt yet,” says Burton.

Rewards-based crowdfunding allows individuals to donate towards a specific project with the guarantee of receiving a non-financial reward or product in exchange for their contribution.

The SC is currently calling for like-minded individuals to participate in the Alliance of FinTech Community (aFINity@SC), to catalyse greater interest in the development of emerging technology-driven innovations in financial services in Malaysia.

The SC’s framework is expected to unlock a great amount of potential capital and open up innovation in the start-up and SME scene. “We are in discussions, potentially, to do a possible joint venture in Malaysia because we are interested to expand to countries where the regulatory environment is ready,” Burton says, adding that it is going to be a very exciting market.

However, she thinks it would be better for Malaysia to focus on alternative financing models generically rather than zeroing in on specific sectors, as it will take time to build awareness. “There will be a lot of work involved and people will need to be patient as it will take time for the public to understand and put their money behind it. 

“Don’t be disappointed if in the first year, things move slower than you think. [It should] because it takes time to build awareness. In the UK, 57% of the population have heard the term ‘crowdfunding’ in some context and 14% have invested to date. But that is [after] years of building market awareness and understanding.”

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